Pôle Dirigeants et administrateurs

Antecedents and consequences of the two-tier board structure, SMS 2010

The two-tier board structure departs from the traditional unitary board by instituting two distinct structures clearly separating the management function from the control function. Indeed, the two-tier board structure introduces on the one hand, a directorate, which consists primarily of a number of executives whose main responsibility is to assure the strategic management of the firm. On the other hand, the two-tier structure introduces also a supervisory board, which includes a number of non-executive directors who have three main tasks. First, they appoint, monitor and dismiss members of the directorate. Second, they are in charge of preparing the annual financial statement, which should be approved at the annual shareholders meeting. Finally, they have to control and approve all major strategic decisions, related for example to diversification, mergers, acquisitions, restructuring, or financing proposed by the directorate.

Although the two-tier board structure has witnessed a fast growing diffusion in European countries, very few studies have examined whether such dual structure actually translates in better board oversight quality and firm performance. In addition, a fewer number of studies have examined the motivations which led firms to adopt the two-tier structure. These two research questions are particularly compelling in countries in which the adoption of the dual structure is optional, like in France, in contrast to other countries where the dual structure is compulsory for all large and medium-sized firms such as in Germany or the Netherlands. This study attempts to fill this gap by examining whether the implementation of the two-tier board structure reinforces the link between firm performance and CEO dismissal and whether it produces noteworthy performance enhancements. Furthermore, this study contributes to corporate governance literature by examining whether the need to attract foreign shareholders and to manage socio-political and managerial processes surrounding mergers and acquisitions drives the decision to switch to the two-tier board structure. To accomplish these objectives, we rely on a longitudinal sample of 250 French firms over the period 1997 through 2008.